according to schweser “relative to growth stocks, value stocks tend to have higher earnings volatility” … should it be the other way around?
Growth stocks tend to be more established companies i bleive and hence they would have less volatile earnings because they are established and have an established product base and market…think Coca-Cola, GE (ok bad example), Pepsi, Altria, etc. If I’m wrong someone please correct me, as it is 3:30 on a Friday and I’m ready for the weekend…
i dont think u r right. those should be characteristics of value stocks (low PE, dividend paying names).
Given the context of the reading…they are talking about the cyclicality(sorry, can’t spell today) of value and growth stock. Value stock’s earning tends to move along with economic cycle===.more volatile, however, growth stock’s earning is less sensentive to economic cycle===> less volatile. Hence, book suggested that during a recession, growth stock will outperform value stock.
growth stocks also tend to outperform in slowdowns b/c earnings momentum becomes scarce and investors bid up the price of that scarcity, if only a few companies are growing then investors will want to hold those stocks and thus push up the price.
i am still not convinced. inflation (or cyclicality) is a slow moving signal. even value stocks has correlation of one with it. how much would it add up to its total volatility? but, a 50% earning growth of google would translate into its earning volatility right away. bottom line, value names are low growth names. what does “low growth” mean then?
bigwilly Wrote: ------------------------------------------------------- > growth stocks also tend to outperform in slowdowns > b/c earnings momentum becomes scarce and investors > bid up the price of that scarcity, if only a few > companies are growing then investors will want to > hold those stocks and thus push up the price. but, we are not talking about price vol. we are talking about earning vol.
stable earnings growth throughout economic cycle = stable price vol…
rand0m Wrote: ------------------------------------------------------- > > > but, we are not talking about price vol. we are > talking about earning vol. EXACTLY!!! For a value company, it is more mature and slow growth company, so macro factor affect value stock MORE than affecting growth stock. As a more mature and slow growth company, earning is tied more to general ecnonmic activities. (Beta). As with a growth company, it is still growth, less mature, business is still more concertrated, their earning is not(less) subject to the general economic envorinment.
Guys/Gals…a Value Company doesn’t = a Value Stock and a Growth Company doesn’t = a Growth Stock necessarily. So are we discussing Value/Growth STocks or Value/Growth Companies???
bigwilly Wrote: ------------------------------------------------------- > Guys/Gals…a Value Company doesn’t = a Value > Stock and a Growth Company doesn’t = a Growth > Stock necessarily. So are we discussing > Value/Growth STocks or Value/Growth Companies??? Thank you!!!
ws Wrote: ------------------------------------------------------- > rand0m Wrote: > -------------------------------------------------- > ----- > > > > > > but, we are not talking about price vol. we > are > > talking about earning vol. > > > EXACTLY!!! For a value company, it is more mature > and slow growth company, so macro factor affect > value stock MORE than affecting growth stock. As > a more mature and slow growth company, earning is > tied more to general ecnonmic activities. (Beta). > As with a growth company, it is still growth, less > mature, business is still more concertrated, their > earning is not(less) subject to the general > economic envorinment. following the same macro line as yours. in term of global economy, us is a value stock and india would be a growth stock. the earnings are just their gdp. i can still argue that us’ gdp is less volatile (1~2% growth rate) than india’s (~10% growth rate).
bigwilly Wrote: ------------------------------------------------------- > stable earnings growth throughout economic cycle = > stable price vol… we dont know which one is more stable. all we know is low growth vs high growth. from there, we have to figure out which one is more stable.
deleted what I previously said think about this: In periods of low economic activity companies with nonproductive capacity (value companies) suffer greater negative volatility in earnings because the burden of nonproductive capacity increases and they find it more difficult to adjust capacity than do growth companies.
rand0m Wrote: > following the same macro line as yours. in term of > global economy, us is a value stock and india > would be a growth stock. the earnings are just > their gdp. i can still argue that us’ gdp is less > volatile (1~2% growth rate) than india’s (~10% > growth rate). In this context, you have to consider terms in relative terms, instead of absolut terms. Using global economy, the US ecnonmy is more mature, therefore it is more influenced by global economy. Given a global slowdown, USD GDP will suffer more than Indian GDP. Beta vs Std. US have more Beta, India has more Std.
You are also looking at a “stock” by “stock” basis and the key word was “tend” and not “always” so you can’t use the US and India as proxies and draw a conclusion…too small sample size. Should have learned this in L1 and L2 Quant 
my view on style investments, growth investors are out there to capture growth premium. the earning vol is essentially what that premium is for. p/e are generally high for this group of stocks. the only way to justify the high p/e is the expectation that the e will go even higher. value investors are out there to capture value premium. the p/e or (p/b) vol is what this premium is for. they dont concern about e that much. these companies have stable e’s to start with (banks and utilities). it’s the low p that makes these group of stocks attractive. given what you guys have said. i may have to redo my work on this subject then.
My understanding is that “growth” companies are expected to buck the trend in a recession/slow down and hence there is a flight of capital towards growth companies in a recession. Where as value companies are impacted by recession and hence there is a flight of capital away from them. Atleast that is the CFAI story BTW, the US recession has caused the Indian market to tank to a larger extent than the US. Volumes have dried up and indices are down a third from their peak. Quiet contrary to what’s expected for a Growth stock (economy) vs a value stock (economy) in a slow down. Incidentally the mood on the streets seems a lot more upbeat than in the US inspite of the crash.
rand0m Wrote: ------------------------------------------------------- > according to schweser > > “relative to growth stocks, value stocks tend to > have higher earnings volatility” … which page on schweser do you read this? > should it be the other way around? I won’t describe value stock on volatility of earnings. The only thing I can say is that value stocks are having unattractive (or relatively low) earnings at the moment. There has been such a long discussion here so what’s the conclusion to this? - sticky
The original statement in CFAI, pg. 121 Reading 31… “A value-oriented portfolio will hold companies with greater earnings variability because of the willingness to hold companies with cyclical earnings.” Basically they’re saying that value-oriented manager is more willing to ride out some bad times if he feels current low price will rise to meet higher intrinsic value in the longer term. Schweser (Book 3, pg. 137) pretty much says the same thing. Not sure where rand0m’s quote is from.